The Hindu Business Line : The India effect on foreign investors

Today, in most global economic forums much debate goes on about the growth of the middle-class and consumerism in India. The Indian market is greatly influenced by the youth and working class, aspiring for better life thanks to their growing disposable incomes.

But who reaps the fruits of this growing consumer market? The beneficiaries are mainly foreign investors, though the drivers are the domestic consumers. In contrast, in China, the players and drivers are both foreign investors; after all, it is the world’s biggest workshop for consumer durables.

Swelling Consumer Market

If India’s GDP continues to grow robustly, at 8-9 per cent, the consumer market too will boom. According to McKinsey & Company, from the current ranking of 12th, India will rise to become the world’s fifth largest consumer market in 2025, surpassing Germany.

This will be thanks mainly to the middle-class that forms the backbone of consumer market. According to NCAER (National Council of Applied Economic Research) estimates, there are 56 million people in the income bracket of $4,400 – $21,800 a year, who are defined as middle-class.

This group will grow rapidly and reach 583 million by 2025, according to the Mckinsey report. The upper-middle-class is expected to reach 38 million in 2007, more than the population of Australia today.

With the middle-class group expanding, the structure of spending will also change. The spending on food and apparel will come down while that on communication, health, and consumer durables will rise.

According to the McKinsey survey, the average real household disposable income in India will rise at a compound annual growth rate of 5.3 per cent between 2005 and 2025. This is higher than the US average of 1.5 per cent over the past two decades. The aggregate consumption in India will increase in real terms from Rs 17 trillion in 2005 to Rs 70 trillion by 2025.

Advantage foreign investors

The change in the consumer spending pattern has drawn foreign investors, with their modern technology and deep pockets, to the fast growing Indian market. The major beneficiaries have been the Koreans, Japanese and American manufacturers.

While the Koreans have established themselves in the home electrical appliances market, the Japanese and the Americans dominate the automobile and FMCG sectors respectively. .

Entering India after the Japanese, whose brands were well known world-wide, the Koreans managed to overwhelm the market with their aggressive strategies.

Korean giants have garnered 40-50 per cent of the market in colour TV sets, air-conditioners, refrigerators and washing machines. The Japanese share has slipped to 13 per cent in colour TV sets and 2 per cent in air–conditioners.

In automobile, however, Japan remains the lead player. Unlike electronics and electrical appliances,

Japan was the first to enter the Indian automobile market and has managed to retain its dominant position. About 50-65 per cent share of the market in passenger cars, and scooters and motorcycles is with the Japanese manufacturers.

There are three factors that ensured the Korean success in the Indian consumer durables market: Adaptability to the diversified market conditions; localisation of human resource from management to workshop; and large investments in local Research and Development. The last factor played a particularly key role.

Local empowerment is another strategy which helped the Koreans edge out others. Almost 99 per cent of the decisions are made in India independently.

The Indian consumer market has emerged a hotbed for foreign investors. So far only the urban market has been tapped. A vast rural market remains largely unexplored. There is huge gap between demand and supply in the domestic market.

Some foreign producers have tried to use the FTA (Free Trade Agreement ) route to tap this market. But not with much success. The only way for foreign investors is to invest and enter the market.

(The author is Adviser, Japan External Trade Organisation. The views are personal )

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